Betting on Brazil? It's an Olympic-size bet

Your neighbor, Sam, is a spur-of-the moment guy. He grabbed a flight to Tahiti and became lifelong friends with Quentin Tarantino at a fish fry. And when he took a flier on a Chinese construction company stock before the Bejing Olympics, he made enough money to back the Tahitian luge team at Sochi next month.

You hate Sam. When you returned from your last whimsical trip, you brought back a pair of crutches and a knee that sounds like you're getting your tires rotated. Still, you're intrigued by Sam's China play. After all, Brazil is hosting the World Cup this year, and the summer Olympics next year. Is there a good Brazilian – or Latin American – stock play?

In a nutshell: There are plenty of ways to invest in Brazil specifically and Latin America generally. But you're probably not going to make a quick killing on any of them. And massive sports events are usually not the best reason to invest in a particular country. "I'm from Toronto, and I remember the 1976 Olympics," says Adam Kutas, manager of Fidelity Latin American Fund. "I think they're still paying for it."

The 2008 Beijing summer Olympics, of course, was an exception. Investing in China in the two years leading up to the Beijing games would have been extremely lucrative: China's market soared 80%, vs. a 0.7% loss for the S&P 500. But you can't lay all the gains in China's market on the Olympics alone, despite China's frenzied $15 building program leading up to the games.

Brazil has considerable spending planned for both the World Cup and the Olympics, but it also has pretty stiff headwinds as well. "Developed markets are living in the 1930s, but emerging markets are living in the 1970s – a period of rising costs and slow growth," says Kutas.

Frederico Sampaio, chief investment officer for Brazilian equities at Franklin Templeton, agrees. "No one expects high growth," he says. Brazilian gross domestic product should grow about 2% this year, and inflation should run at about 6%. "The scenario is that we'! ll have a kind of mediocre year."

Brazil is also suffering from two other problems. The first is its neighbor to the south, Argentina, which saw its currency plunge nearly 15% Thursday. Despite Argentina's rich natural resources and educated populace – at the end of the 19th century it was considered a strong rival to the U.S. – the country's chronic mismanagement often rubs off on its neighbors, at least in the short term.

The other problem, ironically, is China, which shows worrisome signs of slowing. HSBC's survey of manufacturers showed slowing in the last quarter of 2013. The index fell below 50, a sign that the Chinese expansion was faltering. "It's the first contractionary reading in quite a while," says Alec Young, Global Equity Strategist for S&P Capital IQ.

Countries with large exports to China – and Brazil is one – got hit particularly hard. The iShares MSCI Brazil fund (ticker: EWZ) fell 2.51% Thursday on the news.

If you're banking on the growth of Brazil's emerging middle class, you need to be patient. Businesses that cater to the consumer depend on rising incomes, and those are growing slowly. And, says Fidelity's Kutas, the interests of the emerging middle class might not benefit local companies. "You talk to an 18-year-old and ask what he wants to buy, and he'll tell you it's an iPod, not a t-shirt made locally," Kutas says. If consumers are spending money on imported goods and the prices of exports are falling, you have a recipe for slow growth.

Which brings us to one good thing about Brazil: It's reasonably cheap. The Brazilian stock market sells for about 9 times estimated 2014 earnings, vs. about 15 times earnings for the Standard and Poor's 500 stock index, Young says. And the iShares MSCI Brazil fund has a 12-month yield of 3.25%, vs. 1.82% for the SPDR S&P 500 fund.

Finding the right mix of improving growth and low stock prices isn't easy anywhere in Latin America. Mexico, for example, does seem to have improving economic co! nditions,! says Sean Lynch, global investment strategist, global investment strategist, Wells Fargo Private Bank. Its economy is closely tied to the U.S., and U.S. economic growth, while not robust, is improving.

Mexico may begin to allow more foreign investment in its oil industry, which could boost flagging production. And its manufacturing sector is also booming, Lynch says. Companies like Cemex, the Mexican cement company, are worldwide powerhouses.

The drawbacks: Mexico is undergoing an initial public offering boom, which should always be viewed warily. And the stocks there are not cheap, Young warns: They sell at about 16 times 2014 earnings. "It's very expensive," Young warns.

If you're a patient, long-term investor, Latin America does offer a surging middle class and a good commodity play, too. To some extent, you can get exposure to Latin America through multinational companies: You'll see Coca-Cola and McDonald's throughout Latin America.

More adventurous investors might consider a broadly diversified Latin American fund: The four with five-year records are in the chart. If you're considering a single-country fund, you should either be a trader with lots of tolerance for volatility, or someone with relatives in that country. Otherwise, your odds of making big money will be about the same as Tahiti winning the luge this year.